SPARK STRATEGY

Why Household savings have been falling in India

Market participants and policy makers including the RBI are wondering why the interest rates are not coming down despite the 50bps cut in
the repo rate since Feb’19 and Rs. 3.35tn liquidity infusion by the RBI (OMO purchase: Rs. 3tn and dollar swap facility: Rs 350bn). The answer SPARK STRATEGY
lies in the falling household (HH) savings in India. Household savings have been the biggest source of funding for India’s credit demand. 10 April 2019
However, HH savings have fallen to two decades low to 17.2% of GDP in FY18 vs. 25.2% of GDP in FY10. The main reason for the dwindling HH
savings is a sharp jump in HH financial liabilities, which have nearly doubled from Rs. 3.9tn in FY16 to Rs. 7.4tn in FY18, may be due to surge in BSE Sensex 38939
lending from Banks, Micro finance and NBFCs. In the light, the important question is whether OMO or dollar swap facility is the answer to
India’s falling HH savings. We think the dollar swap facility created by the RBI or massive OMO purchase carried out in FY19 are not a panacea NSE Nifty 11672
for India’s falling household savings issue. It is a far more structural problem and needs to be tackled if we want to fund our growth (see our
20%
Portfolio Strategy - Not Out of The Woods Yet; Stay Defensive – Mar’19)
15%
#1: Why cost of borrowings continues to remain elevated? Despite the 50bps cut in the repo rate by the RBI since Feb’19, cost of borrowings has
not come down due to 1) Banking sector credit deposit ratio has hit an all-time high of 78.1% in Mar’19 as deposit growth has been lagging the 10%
credit growth (by ~450bps) for over a year now. 2) The net liquidity in the banking system has been in deficit mode for nearly a year. 5%
#2: Why the bank deposit growth not picking up? 0%

a) Household savings have fallen to a two-decade low to 17.2% of GDP from 25.2% of GDP in FY10. This is mainly due to a sharp jump of 92% in -5%

Jun-18

Nov-18
Dec-18
Jul-18

Sep-18
Oct-18

Feb-19
Apr-18

Aug-18

Apr-19
May-18

Jan-19

Mar-19
HH financial liabilities (~2x from Rs. 3.9tn in FY16 to Rs. 7.4tn in FY18) due to surge in lending from Banks, Micro finance and NBFCs. Retail loans
have been growing at ~18% pace in the last 4-years indicating that HH have tucked into their savings to keep up with their expenditure. Since, HH
income did not rise at the same pace to support consumption, HH financial liability jumped, leading to decline in net HH savings. HH financial
Sensex BSE 200
savings have been shifting away from the traditional deposits to Currency, Equity, Insurance sector and Govt. small saving schemes.
# Why financial savings not increasing despite higher real interest rates? Despite high real interest rate in the last 4-years, household financial Performance (%)
savings have not picked up as expected. We think there may be a problem with the calculation of the real interest rate. The CPI for industrial
1m 3m 12m
workers has risen to 7% in Feb’19 while benchmark CPI is just 2.6%. Moreover, as per the RBI survey, the inflation felt by the households is 9.8%
in Mar’19. Which inflation should be used to calculate real interest rate? If we calculate the real interest rate based on inflation expectations of Sensex 2% 4% 13%
HH, real interest rate is still negative at -2% and explains why financial savings are not rising. BSE200 0% 4% 2%
b) Currency in circulation has been rising and it is not due to General Elections: Currency in circulation has been growing at double the pace of
deposit growth rate. Contrary to popular perceptions, General Elections do not impact the overall currency in circulation in the economy as we RESEARCH ANALYSTS
estimate the elections related spend is only Rs. 270bn (~1.3% of total CIC). Furthermore, two of the three times since 2000, currency in circulation GAUTAM SINGH
grew faster 6-months after General Elections vs. 1 month prior to GE. gautam@sparkcapital.in
#3) Is OMO or dollar swap facility the answer to India’s falling HH savings? We think the dollar swap facility created by the RBI or massive OMO +91 22 6176 6804
purchase carried out in FY19 are not a panacea for India’s falling household savings issue. 1) Dollar swap facility is dollar borrowings and can only VIJAYARAGHAVAN SWAMINATHAN
provide temporary solutions with some long term side-effects. 2) RBI’s aggressive OMO purchase of Rs. 3tn in FY19 also does not provide a raghavan@sparkcapital.in
durable solution to the falling HH savings. Also, banks’ SLR holdings have come down to 25.7% of NDTL vs. ~23-24% needed for regulatory +91 44 4344 0022
purpose, limiting the RBI’s OMO purchase in FY20. As per our calculation, banks need Rs. 19.1tn incremental deposits till Mar’20 for 13% credit SUMIT AGGARWAL
growth. To do that, banks would have to increase deposit rates or they would have to face moderation in credit growth. sumit.aggarwal@sparkcapital.in
+91 44 6660 3036
find SPARK RESEARCH on Page 1
(SPAK <go>)
 #1: Cost of borrowings continues to remain elevated due to low bank deposit growth vs. credit growth

Despite the 50bps cut in the repo rate by the RBI since Feb’19, cost of borrowings has not come down
…as deposit growth has been lagging the credit growth (by ~450bps) for over a
#1: Banking sector credit deposit ratio has hit an all time high of 78.1% in Mar’19…
year now

80.0% 30.0
78.1%
78.0% 77.7% 25.0

76.0% 20.0
75.1% 15.0 14.5
74.0%
10.0 10.0
72.0%
5.0
70.0%
69.3% 0.0

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18
Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
68.0%
Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18
Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Deposit growth (%) Credit growth (%)

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

#2: The net liquidity in the banking system has been in deficit mode for nearly a #3: Cost of borrowings continues to remain elevated despite the 50bps cut in the
year repo rate by the RBI since Feb’19
5 4.2 Net liquidity in the system (Rs. tn) 7 8.75 8.56
4 6.8 8.49
6.6 8.25
3 6.6
7.75
2 6.2 6.4
6.3 7.25
1 0.4 6.2
0 6.1 6 6.75 6.50
6.25
6.1
-1 -0.5 -0.4 5.8 6.25
-0.6 -0.8
5.8 -1.0 6.00
-2 -1.3 5.6 5.75
Nov-16

Nov-17

Nov-18
Jul-16

Jul-17

Jul-18
Sep-16

Sep-17

Sep-18
May-17

May-18
Jan-17

Mar-17

Jan-18

Mar-18

Jan-19

Mar-19

Jul-16

Jul-17

Jul-18
Oct-16

Oct-17

Oct-18
Apr-17

Apr-18

Apr-19
Jan-17

Jan-18

Jan-19
Net liquidity (Rs tn) Call money rate (%) - RHS
Repo rate (%) 10Y AAA Corp (%)

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

Page 2
 #2: Why the bank deposit growth not picking up

#1: HH savings have fallen to two decades low led by a sharp jump in HH financial liabilities to support their expenditure
…a sharp jump in HH financial liabilities (~2x from Rs. 3.9tn in FY16 to Rs. 7.4tn in
Household savings have fallen to a two-decade low to 17.2% of GDP led by…
FY18); may be due to surge in lending from Banks, Micro finance and NBFCs…
30 8.0 7.4 70%
Total 92% jump in HH financial
25.2 7.0 liabilities from FY16 to FY18 58%
60%
25
6.0
50%
Total 4.7
20 Total 5.0
13.2 17.2 3.8 3.9 40%
15.7 4.0 3.6
3.3
15 2.9 22% 30%
3.0
6.5 10.6 14% 20%
2.0 9%
10 5%
12.0 1.0 2% 10%
9.2
5 6.6 0.0 0%
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY12 FY13 FY14 FY15 FY16 FY17 FY18
HH Financial Liabilities Growth (%, yoy) - RHS
HH Financial savings (% of GDP) HH Physical savings (% of GDP)

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

…Retail loans have been growing at ~18% pace in the last 4-years indicating that …since HH income did not rise at the same pace. To support consumption, HH
HH have tucked into their savings to keep up with their expenditure… financial liability jumped, leading to decline in net HH savings
Bank lending to HH (% of non-food credit) 1,60,000 18% 20%
25 (Growth, %, yoy) 13.1%
20.4 1,40,000 15% 18%
9.5%
20 Maximum jump in share 14% 14% 16%
1,20,000 12%
13.3 of personal loans and 12% 14%
15 6.9% 1,00,000 11% 11%
credit cards 10% 10% 10% 10% 12%
13.2 9%
10 80,000 10%
11.4 60,000 8%
5 FY14 FY19 3.6% 6%

1,07,341

1,18,263

1,29,901

1,43,048
2.5% 40,000

32,840

37,920

43,046

47,783

54,414

64,372

71,609

80,518

89,796

98,405
1.9% 4%
0
1.1% 20,000 2%
1.1%0.9%
-5 0.5% 0 0%
Nov-10

Jun-15
Dec-09

Oct-11

Jul-14
Feb-08

Sep-12

Apr-17

Feb-19
Aug-13

May-16
Jan-09

Mar-18

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Education Credit Vehicle Personal Housing
cards loans loans loans Income per capita (Rs.) Growth (%, yoy) - RHS
Personal Loans

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

Page 3
 #2: Why the bank deposit growth not picking up

Why financial savings not picking despite higher real interest rates? Is the real interest rate really high?
Despite high real interest rate in the last 4-years, household financial savings have Which inflation should be used to calculate real interest rate? The CPI for
not picked up as expected. Why? industrial workers has risen to 7% in Feb’19 while benchmark CPI is just 2.6%

6 8.0
3.67
3 7.0 7.0
3.37
6.0
0
5.0
-4.12
-3 4.0
-6 3.0
2.6
2.0
-9
-10.60 1.0
-12 0.0
Dec-10

Nov-13

Jun-14

Dec-17
Jul-11

Jul-18
Oct-09

Oct-16
Feb-12

Sep-12

Apr-13

Feb-19
Mar-09

May-10

Aug-15

Mar-16

May-17
Jan-15

Nov-15

Nov-16

Nov-17

Nov-18
Feb-15

Feb-16

Feb-17

Feb-18

Feb-19
Aug-15

Aug-16

Aug-17

Aug-18
May-15

May-16

May-17

May-18
Real interest rate (Repo - CPI, %) CPI inflation (%) CPI (IW) inflation (%)

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

As per the RBI survey, the inflation felt by the households is 9.8% in Mar’19 and If we calculate the real interest rate based on inflation expectations of HH, real
not 2.6% or 7% interest rate is still negative at -2%

4 Real interest rate (10Y Gsec yields - HH inflation expectations)

16.0 HH Inflation Expectations (%) 14.5
2
14.2 2 1
14.0 0
12.0 -2 -2
9.8 -4
10.0
-6
8.0 8.6
7.9 -8
7.4 -10
6.0
-12
4.0
09-2008
03-2009
09-2009
03-2010
09-2010
03-2011
09-2011
03-2012
09-2012
03-2013
09-2013
03-2014
09-2014
03-2015
09-2015
03-2016
09-2016
03-2017
09-2017
03-2018
09-2018
03-2019
09-2008
03-2009
09-2009
03-2010
09-2010
03-2011
09-2011
03-2012
09-2012
03-2013
09-2013
03-2014
09-2014
03-2015
09-2015
03-2016
09-2016
03-2017
09-2017
03-2018
09-2018
03-2019

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

Page 4
 #2: Why the bank deposit growth not picking up

#2: Currency in circulation has been rising and it is not due to General Elections as we estimate the elections related spend is only ~1.3% of total CIC
Currency in circulation is growing at double the pace of deposit growth rate; while Contrary to popular perceptions, General Elections do not impact the overall
market believes that this is due to elections, the data does not support it currency in circulation in the economy
25 Growth in currency in circulation (%, yoy)
2 of the 3 times since 2000,
20 Currency in circulation grew
18.4 20 17.7 18.2
17 faster 6-months after the after
15.8
15 14.5 General Elections vs. 1 month
15
10 prior to GE.
10 9.2 10.6
10
5
5
0
Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18
Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
0
2004 2009 2014 2019

Deposit gr (%) Currency in circulation gr 1-month before General elections 6-months after General elections

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

The money multiplier has come down to 5.6 in Feb’19 from near 6 a year ago
The overall elections related spend is too small in the overall scheme of things
mainly due to higher currency in circulation growth
6.0
This assumes that Rs. 0.5bn per constituency is spent in cash and this Decline in money multiplier is resulting in
Rs. bn 5.91
cash doesn't come bank to the banking system 5.9
weaker broad money supply in the economy
and slowdown in economic activities.
5.80
Per constituency spend on Elections 0.5 5.8

Total constituencies 542 5.7

5.6
5.6
Total expenditure related to elections 271
5.5

Jun-18

Nov-18

Dec-18
Jul-18

Oct-18
Feb-18

Apr-18

Aug-18

Sep-18

Feb-19
Mar-18

May-18

Jan-19
Total currency in circulation in the economy 21,500

Share of General Elections related spend in total CIC 1.3% Money Multiplier

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

Page 5
 #3: Is OMO or dollar swap facility the answer to India’s falling HH savings?

We think not; Banks need Rs. 19.1tn incremental deposits till Mar’20 for 13% credit gr; either deposit rates go up or credit gr should moderate
#1: Dollar swap facility is unlikely the answer to falling HH savings. It’s just a dollar #2: RBI’s aggressive OMO purchase of Rs. 3tn in FY19 also does not provide a
borrowings and can provide temporary solutions; it would have side-effects too durable solution to the falling HH savings…

3.5 71% 80%

2,500 Total liquidity injections (Rs. bn)
3.0
2,100 60%
2.5
2,000 33%
2.0 31% 32% 40%
1.5 21%
1,400 13%
1,500 1.0 12% 20%
0.5 0.67 1.34 1.55 0.52 0.52 1.10 2.98
-0.40 0%
1,000 0.0
700 -0.90
-0.5 -9% -20%
500 -1.0 -20%
-1.5 -40%
- FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Case I: $10bn swap CaseII: $20bn swap Case III: $30bn swap
RBI OMO purchase/sale (Rs tn) OMOs % of net mkt borrowings

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

…and banks are also close to exhausting their surplus SLR holdings as SLR holdings Banks need Rs. 19.1tn incremental deposits till Mar’20 for 13% credit gr; either
have come down to 25.7% of NDTL vs. ~23-24% needed for regulatory purpose deposit rates should to go up or credit gr should moderate
30.0 16.0
To achieve 13% credit growth and 11% deposit growth in 13.6 14.0
29.5 SLR as % of DTL 14.0 FY20, absolute amount needed in FY20E
29.0
28.4 12.0
28.5
28.0 10.0 8.9
27.5 7.5
8.0
27.0
6.0 5.1
26.5
26.0 4.0
2.3
25.5 25.7 2.0
25.0
0.0
9-May-18
13-Jun-17

10-Nov-17
10-Dec-17
9-Jan-18

4-Jan-19

5-Mar-19
13-Jul-17

11-Oct-17

5-Nov-18
5-Dec-18
8-Jun-18
14-Apr-17

11-Sep-17

8-Jul-18

6-Oct-18
14-May-17

12-Aug-17

8-Feb-18

9-Apr-18

6-Sep-18

3-Feb-19
15-Mar-17

10-Mar-18

7-Aug-18

01 Apr 2018 to 15 Mar 2019 16 Mar 2019 to 31 Mar 2019 FY20E

Credit (Rs. tn) Deposits (Rs. tn)

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

Page 6
 #4: Appendix – Trend in Household financial savings

HH savings have been shifting away from deposits to Currency, Equity and Insurance sector

# Proportion of deposits in HH financial savings has been declining # Proportion of currency in HH financial savings has rising

Deposits (% of HH financial savings) 14.0 Currency (% of HH financial savings) 13.4

65.0
13.0
60.0 57.9 13.0
56.2
55.0 12.0

50.0 11.0

45.0 10.0

40.0 43.2 9.0

35.0 37.4 8.0 8.3 8.4

30.0 7.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

# Proportion of shares and debentures in HH financial savings has inched up # Proportion of insurance funds in HH financial savings has also gone up

Shares and Debentures (% of HH financial savings) Insurance Funds (% of HH financial savings)

9.9
10.0 26.0 24.2 24.3
24.0
8.0
22.0
6.0 20.0
4.0 18.0 16.1
18.0
2.5 16.0 16.9
2.0
2.0 14.0
1.6
0.0 12.0
-0.6
-2.0 10.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: RBI, Spark Capital Research Source: RBI, Spark Capital Research

Page 7
 Strategy Note

Spark Disclaimer
BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon
Absolute Rating
Interpretation
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon

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 Strategy Note

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Page 9